Disclosure of Incentive Pay Targets Improved in 2007

Corporations are making progress in disclosing more details about how executives’ bonuses are determined—but many are still far from giving regulators and shareholders the full monty.

February 21, 2008

Corporations are making progress in disclosing more details about how executives’ bonuses are determined—but many are still far from giving regulators and shareholders the full monty.

While almost all companies now disclose the metrics used to determine executives’ annual incentive pay, only about a third of corporations in the S&P 500 actually disclose the specific targets they use to make these calculations, according to a new study conducted by the Corporate Library.

The difference between disclosing metrics and targets isn’t just semantics, according to Paul Hodgson, senior research associate at the Corporate Library. “Without knowing the actual targets, you don’t know how difficult—or how easy—it was for an executive to earn their bonus.”

So while a company may note that it considers earnings per share, for example, when determining executive pay, it likely would decline to disclose that it set a goal of $0.32 earnings per share, Hodgson pointed out.

A number of companies have not included such specific performance targets, claiming that by doing so, they could be putting themselves at a competitive disadvantage. Many companies making such claims were criticized in October by the Securities and Exchange Commission for failing to make adequate disclosures, with regulators stating at the time that these companies should look to provide more clearly defined targets in their 2008 proxies.

Despite the lack of total disclosure, Hodgson noted that in 2007, 32.7 percent of companies in the S&P 500—or 160 companies—disclosed specific performance targets, compared with only 10 companies that did so in 2004.

“It’s a significant step forward,” he said, adding that he expects more than half of all companies to reveal specific targets in this year’s proxy filings.

The Corporate Library’s findings come several weeks after a similar study by Watson Wyatt noted that just 42 percent of companies plan to disclose the exact performance measures considered in executive pay packages. About 30 percent of companies said they do not plan to make such disclosures, and the remaining 27 percent said they were not sure whether they would include such details.